Bruce Selig and Elaine Selig v. Commissioner , 1995 T.C. Memo. 521 ( 1995 )

T.C. Memo. 1995-521UNITED STATES TAX COURT
BRUCE SELIG AND ELAINE SELIG, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19151-93. Filed October 31, 1995.
P exhibited "exotic automobiles", state-of-the-
art, high technology vehicles with unique design
features or equipment, for a fee. Ps claimed
depreciation deductions for such automobiles. P's
wholly owned S corporation made expenditures related to
P's plans to open an exotic car entertainment complex.
1. Held: The exotic automobiles were subject to
obsolescence and, thus, were depreciable under secs.
167 and 168, I.R.C.
2. Held, further, the expenditures made by P's
wholly owned S corporation are nondeductible under sec.
162(a), I.R.C., on account of being preopening expenses
not incurred in a trade or business of the corporation.
3. Held, further, the sec. 6661, I.R.C.,
additions to tax and sec. 6662, I.R.C., penalties
determined by respondent are, in part, sustained.
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Richard J. Sapinski and Robert J. Alter, for petitioners.
Robert A. Baxter, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN, Judge: Respondent determined deficiencies in
income tax and additions to tax as follows:
Additions to Tax and Penalties
Sec. Sec. Sec.
Year Deficiency 6651(a) 6661 6662(a)
1987 $88,837 --- $39,264 ---
1988 62,391 --- 13,020 ---
1989 58,838 $22,260 --- $11,768
1990 51,762 --- --- 10,352
After concessions, the issues remaining for decision are
(1) whether petitioners are allowed depreciation deductions with
regard to certain "exotic automobiles" owned and exhibited by
petitioner husband, (2) whether Exotic Bodies, Inc., an
S corporation within the meaning of section 1361(a)(1), was
engaged in a trade or business such that petitioners may claim
certain losses from that corporation, (3) the basis of certain
shares of stock in BSG Corp., and (4) petitioners' liability for
the additions to tax under section 6661 and penalties under
section 6662(a) set forth above.
In their opening brief, petitioners proposed no findings of
fact or made any argument with regard to the basis of any shares
in BSG Corp. In her opening brief, respondent argued that, since
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petitioners bear the burden of proof, and have failed to
introduce any evidence, the Court should find against petitioners
and hold for respondent on that issue. In their reply brief,
petitioners state that, subsequent to the trial, petitioners and
respondent "agreed that the adjustment to the capital gain
realized by petitioners in 1989 with respect to Bruce's basis in
BSG Corp. proposed by respondent was correct." We take that as a
concession by petitioners and, on that basis, sustain so much of
the deficiencies as relate to that issue. In a footnote,
petitioners added:
Petitioners contend that the parties' agreement
with respect to respondent's determination of Bruce's
basis in BSG Corp. in this case allows them to correct
their erroneously computed share of BSG Corp.'s
subchapter S corporation losses in 1985 and 1986 under
I.R.C. § 1311-1314.
Suffice it to say that neither 1985 nor 1986 is a year before us,
and, therefore, we have no jurisdiction to determine any
overpayment for either of such years. See sec. 6512(b).
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations of fact filed by the parties and attached
exhibits are incorporated herein by this reference.
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Petitioners resided in Cherry Hill, New Jersey, at the time
the petition was filed.
Petitioners are husband and wife, who made joint returns of
income for each of the years in question.
Petitioner husband (petitioner) is a successful businessman.
In 1983, petitioner opened a limousine leasing business under the
name "Scott's Limo & Leasing" (Scott's Limo). Scott's Limo was
conducted as a sole proprietorship. Exotic automobiles are
state-of-the-art, high technology vehicles with unique design
features or equipment. In 1987 and 1988, petitioner purchased
the following exotic automobiles (the exotic automobiles) to be
exhibited at car shows:
Year of Purchase Type Cost
1987 Lotus Pantera $63,000
1987 Lotus Espirit $48,000
1988 Gemballa FerrariTestarossa $290,453
During the years in issue, Scott's Limo displayed the exotic
automobiles at car shows and earned fees for doing so. For 1987
through 1990, Scott's Limo received gross income with respect to
the exotic automobiles as follows:
Year Gross Income
1987 $8,555
1988 38,120
1989 24,295
1990 25,760
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The exotic automobiles did not have license plates and were not
set up to be used on the street. They were not driven and were
used exclusively for car shows or related promotional
photography.
Petitioners claimed the following depreciation deductions
with regard to the exotic automobiles:
Depreciation Claimed In:
Automobile 1987 1988 1989 1990
Lotus Pantera $12,600 $20,160 $12,096 $7,258
Lotus Espirit 9,600 15,360 9,216 5,530
Gemballa Ferrari 58,091 92,945 55,767
Testarossa
Exotic Bodies, Inc. (the corporation), is a New Jersey
corporation. At all times here relevant, the corporation was
wholly owned by petitioner. The corporation was organized in
1987. For 1988, 1989, and 1990, the corporation was an
S corporation within the meaning of section 1361(a)(1). For
those years, the corporation made its Federal income tax returns
on the basis of a calendar year. The corporation was formed for
the purpose of putting together exotic cars for shows as well as
for cross-promoting different products (e.g., automobile-related
paraphernalia, such as T-shirts and frames for license plates).
The corporation was a marketing vehicle for the promotional
aspects of the exotic cars owned by petitioner.
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For 1988, the corporation reported gross receipts of $8,369
and an ordinary loss of $31,531 on its Federal income tax return.
Those gross receipts, along with $16,405 of corporate expenses,
which were accepted as verified by respondent, were allocated by
respondent to Scott's Limo. Petitioners have agreed to that
adjustment.
For both 1989 and 1990, the corporation reported gross
receipts of zero on its Federal income tax return. For 1989, it
reported an ordinary loss of $13,218; for 1990, it reported an
ordinary loss of $13,357. Neither the corporation's 1989 return
nor its 1990 tax return reflects either a cost of goods sold, an
inventory, or any wages paid to employees. The corporation sold
no merchandise during either 1989 or 1990.
OPINION
I. Introduction
We must decide (1) whether certain automobiles owned by
petitioner give rise to deductions for depreciation for tax
purposes, (2) whether petitioner's S corporation was in a trade
or business, so that petitioners may claim certain losses
incurred by such corporation, and (3) whether petitioners are
liable for certain additions to tax. Petitioners bear the burden
of proof. Rule 142(a).
II. Depreciation
Section 167(a) provides that a reasonable allowance for the
exhaustion, wear and tear, and obsolescence of property used in
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the trade or business or of property held by the taxpayer for the
production of income shall be allowed as a depreciation
deduction.1
Generally, section 168(a) provides that the depreciation
deduction provided by section 167(a) for any tangible property
shall be determined by using certain applicable methods, periods,
and conventions.2
Exotic automobiles are state-of-the-art, high technology
vehicles with unique design features or equipment. Petitioner
owned exotic automobiles that, during 1987 through 1990, he
exhibited for a fee. The fees earned by petitioner for such
1
Sec. 167(a) provides as follows:
General Rule.--There shall be allowed as a depreciation
deduction a reasonable allowance for the exhaustion,
wear and tear (including a reasonable allowance for
obsolescence)--
(1) of property used in the trade or business, or
(2) of property held for the production of
income.
2
Sec. 168(a) provides as follows:
Accelerated Cost Recovery System
General Rule.--Except as otherwise provided in this
section, the depreciation deduction provided by section
167(a) for any tangible property shall be determined by
using--
(1) the applicable depreciation method,
(2) the applicable recovery period,
(3) the applicable convention.
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exhibitions were substantially less than the depreciation
deductions petitioner claimed with respect to such automobiles.
The parties do not dispute either that (1) the exotic
automobiles are tangible property or (2) the exotic cars were
used in petitioner's trade or business. Also, they do not
dispute any aspect of applying section 168 to the exotic
automobiles if we conclude that section 168 is applicable to the
exotic automobiles. The dispute between the parties is whether a
depreciation deduction is allowable under section 167(a) for
automobiles held in a pristine condition and exhibited for a fee.
The long and the short of it is yes, providing the
automobiles are subject to obsolescence. We have found that the
exotic automobiles were state-of-the-art, high technology
vehicles with unique design features or equipment. We have no
doubt that, over time, the exotic automobiles would, because of
just those factors, become obsolete in petitioner's business.
The fact that petitioners have failed to show the useful lives of
the exotic automobiles is irrelevant. Cf. Liddle v.
Commissioner, 103 T.C. 285, 296-297 (1994), affd. 65 F.3d 329(3d Cir. 1995); Simon v. Commissioner, 103 T.C. 247 (1994), affd.
__ F.3d __ (2d Cir. 1995)
In the Liddle and Simon cases, we interpreted section 168,
as added to the Code by section 201(a) of the Economic Recovery
Tax Act of 1981 (ERTA), Pub. L. 97-34, 95 Stat. 172, 204 (sec.
168 (1981)). The operative term in section 168 (1981) is
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"recovery property". The term "recovery property" is defined in
relevant part to mean "tangible property of a character subject
to the allowance for depreciation * * * used in a trade or
business". Sec. 168(c)(1) (1981). In the Simon case, we dealt
with two antique violin bows that the taxpayers, both
professional musicians, used in that trade or business. In the
Liddle case, we dealt with an antique viol, also used by a
professional musician in his trade or business. In both cases,
we rejected the Commissioner's argument that, for the instruments
to be property of a character subject to the allowance for
depreciation (i.e., recovery property within the meaning of
section 168(c)(1) (1981)), the taxpayers had to show the useful
life of the property. Liddle v. Commissioner, supra at 296;
Simon v. Commissioner, supra at 264. We found it sufficient that
the taxpayers had proven that the instruments were subject to
exhaustion, wear and tear, or obsolescence. Liddle v.
Commissioner, supra at 296-297; Simon v. Commissioner, supra.
In 1986, Congress extensively revised and restated section
168. Tax Reform Act of 1986 (TRA 86), Pub. L. 99-514, sec.
201(a), 100 Stat. 2121. As restated, section 168 is applicable
to property placed in service after 1986. TRA 86, Pub. L.
99-514, sec. 203(a)(1), 100 Stat. 2143. The term "recovery
property" does not appear in section 168, as restated. There is
no indication, however, that Congress intended to reimpose the
requirement, eliminated by ERTA, that a taxpayer must show the
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useful life of property if the taxpayer is to determine the
section 167 depreciation deduction under section 168. Therefore,
we shall follow Liddle v. Commissioner, supra, and Simon v.
Commissioner, supra, in interpreting section 168, as restated.
Accordingly, if petitioners can show that the exotic automobiles
were subject to exhaustion, wear and tear, or obsolescence, they
are entitled to the depreciation deductions that they claimed.
Petitioners do not seriously attempt to prove that the
exotic automobiles were subject to wear and tear in the sense of
physical deterioration. Indeed, they state that obsolescence is
the principal basis for their claim of depreciation deductions.
Respondent argues that petitioners have failed to prove that the
exotic automobiles are subject to obsolescence.
From the beginning, it has been clear that a taxpayer could
recover the cost of business property over a period shorter than
the ordinary useful life of the property if the taxpayer could
show that the assets would become obsolete in the business prior
to the end of such ordinary useful life. See, e.g., Columbia
Malting Co. v. Commissioner, 1 B.T.A. 999, 1001 (1925). Section
1.167(a)-9, Income Tax Regs., addresses obsolescence. In
pertinent part, it states:
The depreciation allowance includes an allowance for
normal obsolescence which should be taken into account
to the extent that the expected useful life of property
will be shortened by reason thereof. Obsolescence may
render an asset economically useless to the taxpayer
regardless of its physical condition. Obsolescence is
attributable to many causes, including technological
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improvements and reasonably foreseeable economic
changes. Among these causes are normal progress of the
arts and sciences, supersession or inadequacy brought
about by developments in the industry, products,
methods, markets, sources of supply, and other like
changes, and legislative or regulatory action. * * *
In Columbia Malting Co. v. Commissioner, supra at 1001, we
said:
In order that the taxpayer may be entitled to the
obsolescence deduction in the years involved, there
must have been substantial reasons for believing that
the assets would become obsolete prior to the end of
their ordinary useful life, and second, it must have
been known, or believed to have been known, to a
reasonable degree of certainty, under all the facts and
circumstances, when that event would likely occur.
* * *
Under section 168(a), we need not concern ourselves with the
second part of that test (when obsolescence would occur), since
we need not determine the actual useful life of the property. As
to the first part of the test, we assume that the "ordinary"
useful life of the exotic automobiles in petitioner's trade or
business (as show cars) was indeterminable. Petitioners have
introduced no evidence from which we could find that the exotic
automobiles were subject to wear and tear or exhaustion.
Nevertheless, we are convinced that the exotic automobiles had a
limited useful life as show cars.
The exotic automobiles are state-of-the-art, high technology
vehicles with unique design features or equipment. Petitioner
testified that show cars such as the exotic automobiles:
are state of the art and within three years or four
years, five years, there could be new cars that are
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more state of the art and cars change based on their
technological opulence * * *
A business associate of petitioner's, Leon Altemose, who had
staged exotic car shows testified:
These highly customized, modified exotic cars have a
limited life and I think it's about a year, typically,
maybe two years and then they start to drop
significantly in value because they are replaced by
something better.
We do not need to determine the precise useful life of the exotic
automobiles. Indeed, petitioner testified that some of the
exotic automobiles might be shown for many years. Nevertheless,
we are convinced that the exotic automobiles, precisely because
of their nature as state-of-the-art, high technology vehicles,
had a useful life as show cars shorter than their ordinary useful
life and, thus, suffered obsolescence. We so find.
Explicit in our finding is a finding that the exotic
automobiles were not museum pieces of indeterminable useful life.
Respondent cites us the U.S. Court of Claims' decision in
Harrah's Club v. United States, 228 Ct. Cl. 650, 661 F.2d 203(1981). At issue there was the cost of restoring antique
automobiles primarily held for display in connection with the
taxpayer's trade or business. The taxpayer argued that the
restoration costs were depreciable over the period in which the
restoration could be estimated to be useful in the business of
the taxpayer. The U.S. Court of Claims disallowed a depreciation
deduction in part on the basis that: "The evidence establishes
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that there is no limit on the useful life of a restored car or
other vehicle as a museum object." Id., 661 F.2d at 207. In
Simon v. Commissioner, 103 T.C. at 264, we acknowledged that, to
qualify as recovery property, in the case of a passive business
asset that suffered no wear and tear, a taxpayer would have to
prove a determinable useful life. An example of a passive
business asset that normally would suffer no wear and tear is a
painting displayed for business purposes. E.g., Clinger v.
Commissioner, T.C. Memo. 1990-459 (painting purchased by a
professional artist and displayed in part for marketing reasons
not recovery property for failure to prove determinable useful
life). Once a taxpayer establishes that an asset is subject to
exhaustion, wear and tear, or obsolescence, however, we need not
concern ourselves with the particular useful life of the asset.
Liddle v. Commissioner, 103 T.C. at 296-297; Simon v.
Commissioner, supra. It is of course possible that the exotic
automobiles might some day become museum pieces. Respondent
suggests that they were museum pieces, but she offers no evidence
to support that claim. We are satisfied that the exotic
automobiles were show cars, which, because of obsolescence, had a
limited useful life, not museum pieces with an indeterminable
useful life. The facts of the Harrah's Club case are
distinguishable.
At the conclusion of the trial in this case, respondent
stated that she no longer would rely on section 183 as a basis
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for disallowing any deductions in this case. Accordingly, we
will not inquire whether petitioner's activity of showing the
exotic automobiles was an activity engaged in for profit.
III. Trade or Business
For 1989 and 1990, respondent disallowed losses passed
through from the corporation to petitioner. Respondent
disallowed such losses in their entirety, in the amounts of
$13,218 and $13,357, for 1989 and 1990, respectively. The
corporation was an S corporation, and petitioner was entitled to
take into account his pro rata share of the corporation's items
of income and loss. See sec. 1366(a). One ground on which
respondent disallowed the losses was that, during 1989 and 1990,
the corporation was not carrying on a trade or business as
required by section 162(a).
Section 162(a) provides in pertinent part: "There shall be
allowed as a deduction all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade
or business".
The corporation reported neither gross receipts nor gross
income for either 1989 or 1990. Its ordinary losses reported on
its Federal income tax returns were composed of the following
items:
1989 1990
Taxes $38 $45
Interest 1,154 892
Advertising 38 100
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Amortization 131 3,057
Bank charges 50 20
Prof. fees 460 ---
Travel 895 ---
Meals &
entertainment 1,511 ---
Telephone 8,941 7,276
Leasing --- 1,130
Office exp. --- 219
Postage --- 618
Total $13,218 $13,357
As to the corporation's activities in 1989 and 1990,
petitioner testified that, for 1989:
It was active but it was not active in marketing
of the clothing at that point in time. There was not a
lot of sales being generated at that point in time. We
were actively marketing the fundraising at that point
in time.
and, for 1990:
We were fulfilling all the obligations for the
future shareholders as well as the shareholders that
were putting Exotic Bodies together. All marketing,
all research, all development.
Petitioners' argument is that the corporation had entered
into business in 1988 and that its expenditures in 1989 and 1990
"were to extend its existing line of business to the higher end
merchandise market". Petitioners rely on Briarcliff Candy Corp.
v. Commissioner, 475 F.2d 775 (2d Cir. 1973), revg. T.C. Memo.
1972-43, for the proposition that a taxpayer's expenditures in
furtherance of its attempt at expansion are currently deductible
under section 162(a). Respondent argues that, in 1989 and 1990,
the corporation had not yet entered into a trade or business and
that its expenditures during those years were nondeductible
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preopening expenses. Respondent cites Richmond Television Corp.
v. United States, 345 F.2d 901, 907 (4th Cir. 1965), vacated and
remanded on other issues 382 U.S. 68 (1965), original holding on
this issue reaffd. 354 F.2d 410, 411 (4th Cir. 1965), overruled
on other grounds NCNB Corp. v. United States, 684 F.2d 285, 289
(4th Cir. 1982), for the proposition that preopening expenses are
nondeductible:
The uniform teaching of * * * [certain prior] cases is
that, even though a taxpayer has made a firm decision
to enter into business and over a considerable period
of time spent money in preparation for entering that
business, he still has not "engaged in carrying on any
trade or business" within the intendment of section
162(a) until such time as the business has begun to
function as a going concern and performed those
activities for which it was organized. [Fn. refs.
omitted.]
We agree with respondent that the expenditures made by the
corporation during 1989 and 1990 were nondeductible preopening
expenses. Petitioners have not carried their burden of proving
that the corporation had engaged in carrying on any trade or
business before or during the years in question. Although the
corporation may have reported gross receipts from the sale of
what petitioners characterize as "mostly low cost merchandise"
during 1988, such receipts and the corporation's verifiable
expenses for 1988 were allocated by respondent to Scott's Limo.
Petitioners agreed to that adjustment. From those facts, we
conclude, and find, that the receipts and expenditures were
incurred in the trade or business of Scott's Limo, not in a trade
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or business of the corporation. We are convinced, and find, that
the corporation was engaged in no trade or business during 1988.
Likewise, we are convinced, and find, that the corporation was
engaged in no trade or business during either 1989 or 1990. We
have found that the corporation sold no merchandise in either
1989 or 1990. Petitioners argue that:
In 1989 and 1990, * * * [petitioner] refocused Scott's
Limo's car exhibition activities on becoming a fixed-
site exhibitor of its exotic cars at his planned exotic
car entertainment complex. Likewise, * * * [the
corporation] refocused its activities during these
years in an effort to continue to compliment [sic]
Scott's Limo's new-found market as the lead exhibitor
at the entertainment complex. * * *
The corporation was to play some role with regard to Scott's
Limo's expansion plans. Whatever that role was, the exotic car
entertainment complex did not open in 1989 or 1990, and the
corporation had not commenced business activities in support
thereof during 1989 and 1990. The corporation's expenditures
during 1989 and 1990 were nondeductible preopening expenses.
Accordingly, we sustain respondent's disallowance of the losses
passed through from the corporation to petitioner.
IV. Additions to Tax
A. Section 6661
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Respondent has determined additions to tax under section
6661 for 1987 and 1988. Section 6661(a) provides for an addition
to the tax for any year for which there is a substantial
understatement of income tax. A substantial understatement is
defined as an understatement that exceeds the greater of
10 percent of the tax required to be shown on the return for the
year or $5,000. Sec. 6661(b)(1)(A). The amount of the addition
to tax is 25 percent of the underpayment attributable to a
substantial understatement. Pallottini v. Commissioner, 90 T.C.
498 (1988). The amount of the understatement, however, is
reduced by amounts attributable to items for which (1) there
existed substantial authority for the taxpayer's position, or
(2) where the taxpayer disclosed relevant facts concerning the
items with his tax return. Sec. 6661(b)(2)(B). Respondent may
waive all or part of the section 6661 addition to tax on a
showing by the taxpayer that there was reasonable cause for the
understatement (or part thereof) and that the taxpayer acted in
good faith. Respondent has determined that all of petitioners'
underpayments of income tax liability for 1987 and 1988 are
attributable to substantial understatements of income tax
liability.
Due to (1) our decision with regard to the depreciation
issue and (2) concessions made by the parties, we are unable to
determine whether there are substantial understatements of income
for 1987 and 1988. We can, however, address the single remaining
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issue raised by petitioners with regard to imposition of the
section 6661 additions for both 1987 and 1988. Any applicable
section 6661 addition to tax can be computed pursuant to
Rule 155.
Petitioners argue that respondent should have exercised her
authority to waive the section 6661 additions to tax for 1987 and
1988 because "petitioners showed reasonable good-faith reliance
on their tax advisers and the positions at issue were, at the
very least, reasonable interpretations of the then-existing case
law and statutory regulatory authority on these issues."
Apparently, petitioners restrict that argument to the
depreciation deductions, which issue we have resolved favorably
to petitioners, and not to any items that may have been conceded
by petitioners. In any event, we do not believe that respondent
abused her discretion not to waive the addition to tax.
While the authority to waive the section 6661 addition to
tax rests with respondent, not with this Court, the denial of a
waiver by respondent is reviewable by the Court under a standard
of abuse of discretion. Mailman v. Commissioner, 91 T.C. 1079,
1084 (1988). Nevertheless, petitioners have not proven that
petitioners sought such a waiver prior to trial or that
petitioners provided to respondent any evidence regarding
reasonable cause or good faith to support a waiver. Petitioners
have not proven that respondent had any information prior to
trial that would have led her to consider waiving the section
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6661 additions. Accordingly, as we noted in Brown v.
Commissioner, T.C. Memo. 1992-15, "we cannot find that respondent
abused * * *[her] discretion when petitioner never requested
respondent to exercise it." See also McCoy Enterprises, Inc. v.
Commissioner, T.C. Memo. 1992-693 (same), affd. 58 F.3d 557 (10th
Cir. 1995) (affg. on precisely that point).
On the premises stated, the section 6661 additions to tax
determined by respondent are sustained.
B. Section 6662
Respondent has determined accuracy related penalties under
section 6662 for 1989 and 1990. Section 6662(a) provides for an
accuracy related penalty in the amount of 20 percent of the
portion of any underpayment of tax liability attributable to,
among other things, any substantial understatement of income tax.
Sec. 6662(b)(2). A substantial understatement is defined as an
understatement which exceeds the greater of 10 percent of the tax
required to be shown on the return for the year or $5,000. Sec.
6662(d)(1)(A). The amount of the understatement, however, is
reduced by amounts attributable to items for which (1) there
existed substantial authority for the taxpayer's position, or
(2) where the taxpayer disclosed relevant facts concerning the
items with his tax return. Sec. 6662(d)(2)(B). No penalty is
imposed with respect to any portion of an underpayment if the
taxpayer can show that there was a reasonable cause for such
portion and that the taxpayer acted in good faith with respect to
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such portion. Sec. 6664(c)(1). Respondent has determined that
all of petitioners' underpayments of income tax liability for
1989 and 1990 are attributable to substantial understatements of
income tax liability.
As is true for 1987 and 1988, due to (1) our decision with
regard to the depreciation issue and (2) concessions made by the
parties, we are unable to determine whether there are substantial
understatements of income for 1989 and 1990. We can, however,
address the two remaining issues raised by petitioners with
regard to imposition of the section 6662 penalties for both 1989
and 1990. Any applicable section 6662 penalties can be computed
pursuant to Rule 155.
Petitioners argue that there was substantial authority for
treating the corporation's expenditures in 1989 and 1990 as those
of an established trade or business. Petitioners rely on the
following proposition:
The evidence established that * * * [the corporation]
had, by 1988, gone far beyond any preparatory efforts
and had, in fact, begun actively selling various exotic
car-related merchandize [sic] at car shows featuring
Scot's [sic] Limo's exotic cars."
Petitioners cite Briarcliff Candy Corp. v. Commissioner, 475 F.2d
775 (2d Cir. 1973) and NCNB Corp. v. United States, 684 F.2d 285(4th Cir. 1982), for the proposition that "expenses incurred
during * * * a business transition or expansion by an existing
business are fully deductible".
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Such authorities are not on point. We have found that the
corporation did not engage in any trade or business in 1988 (or
in 1989 or 1990). In part, we did so in reliance on petitioners'
agreement that the corporation's receipts and verifiable expenses
for 1988 properly were allocable to the trade or business of
Scott's Limo. Petitioners have adduced no authority, substantial
or otherwise, to support deductions on the facts as we have found
them and as, apparently, petitioners have agreed to them.
Finally, in the petition, petitioners aver as a fact, in
support of their assignment that respondent erred in determining
penalties under section 6662, that "petitioners acted in good
faith in reliance on professional advice in filing their returns
as they did and had a reasonable basis for and belief in the
accuracy of said returns." Respondent denies that averment. We
assume that petitioners meant to invoke the reasonable cause
exception of section 6664(c)(1). However, petitioners do not
mention section 6664(c)(1) in their opening brief and, in their
reply brief, state only: "the facts demonstrate that petitioners
come within the provisions of I.R.C. § 6664 and are entitled to
relief thereunder." Apparently, the facts that petitioners rely
on are that "petitioners and their accountant clearly made a good
faith effort to determine their true tax liabilities for the
years at issue." Petitioners have not particularized the
portions of the 1989 and 1990 underpayments with respect to which
they claim to have acted with reasonable cause and in good faith.
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Except perhaps with respect to the depreciation deductions (an
issue that we have resolved in petitioners' favor), petitioners
have proposed no findings of fact that would allow us to conclude
that petitioners acted with reasonable cause and in good faith.
The closest petitioners come is a proposed finding (which we have
declined to make): "Bruce has no accounting or tax background
and depended entirely on Giunta [a certified public accountant]
for tax reporting positions taken * * * [on petitioners' 1988 and
1989 returns]". Petitioners have failed to carry their burden of
showing that they acted with reasonable cause and in good faith
with respect to any portion of the underpayments in tax
determined by respondent for 1989 or 1990 except those portions
of such underpayments attributable to depreciation of the exotic
automobiles. See sec. 1.6664-4, Income Tax Regs.
Subject to the Rule 155 computation, section 6662(a) applies
to the whole of the underpayments determined by respondent for
1989 and 1990 except those portions attributable to depreciation
of the exotic automobiles. To that extent, respondent's
determinations of penalties under section 6662(a) is sustained.
Decision will be entered
under Rule 155.